Client Asset Requirements Under S.I No.60 of 2007 European Communities (Markets in Financial Instruments) Regulations 2007 Instructions Paper November 2007
1 Contents 1 Contents 2 Introduction 1 2.1 Scope of the Requirements 1 3 General Principles 4 3.1 Safeguarding Clients Rights Relative to Financial Instruments 4 4 General Requirements 8 4.1 Financial Instruments and Funds 8 4.2 Segregation 8 4.3 Assets to be held in a Client Account 13 4.4 Default of Qualifying money market, Eligible Credit Institution, Relevant Party or Eligible Custodian 16 4.5 Reconciliations 17 4.6 Failure to perform reconciliations 18 4.7 When Assets Cease to be Client Assets 19 4.8 Client Statements 20 4.9 Auditor s Report 21 4.10 Transactions involving collateral margined transactions 22 4.11 General Information for Clients 24 4.12 Information about Financial Instruments belonging to Retail Clients 25 5 Client Funds 26 5.1 Payment of Client Funds into a Client Account with a Central Bank, an Eligible Credit Institution, Relevant Party or Qualifying money market fund 26 5.2 Written Confirmations 28 5.3 Daily Calculation 29 5.4 Failure to Perform Calculations 30 5.5 Interest 31 6 Client Financial Instruments 32 6.1 Depositing Client Financial Instruments 32 6.2 Safe-Keeping of Client Financial Instruments 33
6.3 Client Agreements 34 6.4 Registration and Recording of Client Financial Instruments 34 6.5 Custodian Agreement 35 7 Securities Financing 38 7.1 Securities Financing Transactions 38 7.2 Securities Financing Records 39 7.3 Security Financing on behalf of Retail Clients 40 7.4 Collateral Held for Securities Lending 40 8 Definitions 41
2 Introduction Having consulted with the European Commission and with the consent of the Minister for Finance, these Requirements are imposed by the Financial Regulator under Regulation 79 of the European Communities (Markets in Financial Instruments) Regulations 2007 (S.I. 60 of 2007) ( the Regulations ) on investment firms that hold client assets. In addition, these Requirements are imposed by the Financial Regulator under Section 52 of the Investment Intermediaries Act, 1995, as amended, ( the IIA ) on investment business firms authorised to hold client assets. Provisions of these Requirements that are shaded restate obligations of the Regulations that apply to investment firms. These provisions are imposed on investment business firms under Section 52 of the IIA. The use of the term firm or firms throughout these Requirements is intended to refer to all investment firms as defined in the Regulations and all investment business firms as defined in the IIA. 2.1 Scope of the Requirements 2.1.1 Client funds consist of funds which, in the course of carrying on investment services, a firm receives or holds for or on behalf of clients. Funds, in turn, includes cash, cheques or other payable orders together with units in a qualifying money market fund and current and deposit accounts maintained with eligible credit institutions or relevant parties. 2.1.2 Client financial instruments consist of financial instruments which, in the course of carrying on investment services a firm receives or holds for, or on behalf of, clients. 1
2.1.3 A firm, which receives or holds client funds or client financial instruments must do so only in accordance with these requirements. 2.1.4 The following paragraphs may provide guidance as to the circumstances in which a firm will, or will not, be deemed to receive or hold client assets. 2.1.5 Examples of circumstances in which a firm will be deemed to receive or hold client funds: (a) A firm will be deemed to hold client funds where funds have been lodged to an account opened by the firm held in the name of the firm or any nominee of the firm with a central bank, qualifying money market fund, eligible credit institution or relevant party on behalf of a client pending investment or reinvestment or being returned to the client, and the firm has the capacity to effect transactions on that account. The funds will cease to be client funds upon the investment or reinvestment or return to the client of the funds. (b) Endorsed cheques will be considered to be client funds from the time of receipt by the firm except where (b) below applies. 2.1.6 Examples of circumstances in which a firm will not be deemed to hold client funds: (a) Where a client, in line with community legislation and in particular Directive 2002/47/EC on financial collateral arrangements, transfers full ownership of financial instruments or funds to a firm for the purpose of securing or otherwise covering a required margin such financial instruments or funds should no longer be regarded as belonging to the client 1. 1 Where a firm has received full title or full ownership to money under a collateral arrangement, the fact that it has also taken a security interest over its obligation to repay that money to the client would not result in the money being client funds. However where a firm takes a charge or security interest 2
(b) A firm which receives a cheque, or other payable order made payable to a firm, eligible credit institution or relevant party (for example a product producer) and which transmits that cheque or other payable order to that party will not be deemed to hold client funds. over money held in a client account that money would still be client money as there would be no absolute transfer of title to the firm. The firm should ensure that client documentation clearly outlines the approach adopted by the firm. Any financial instruments or client funds held by the firm in excess of the required margin should be treated as financial instruments or client funds and treated in accordance with Requirement 4.10. 3
3 General Principles 3.1 Safeguarding Clients Rights Relative to Financial Instruments 3.1.1 2 A firm shall (a) When holding financial instruments belonging to clients, make adequate arrangements to (i) (ii) Safeguard clients ownership rights, especially in the event of the firm s insolvency, and Prevent the use of a client s instruments on own account, except with the client s express consent, (b) When holding funds belonging to clients, make adequate arrangements to safeguard the clients rights and, except in the case of credit institutions, prevent the use of client funds for the firm s own account. 3.1.2 3 For the purposes of safeguarding clients rights in relation to financial instruments and funds belonging to them, firms shall comply with the following requirements: (a) they must keep such records and accounts as are necessary to enable them at any time and without delay to distinguish assets held for one client from assets held for any other client and from their own assets; (b) they must maintain their records and accounts in such a way that ensures their accuracy, and in particular their correspondence to the financial instruments and funds held for clients; 2 Regulation 33(h) & 33(i) 3 Regulation 160(2) & 160(3) 4
(c) they must conduct, on a regular basis, reconciliations between their internal accounts and records and those of any third parties by whom those assets are held; (d) they must take the necessary steps to ensure that any client financial instruments deposited with a third party in accordance with Requirement 6.1 are identifiable separately from the financial instruments belonging to the firm and from financial instruments belonging to that third party by means of (i) differently titled accounts on the books of the third party, or (ii) other equivalent measures that achieve the same level of protection; (e) they take the necessary steps to ensure that client funds deposited in accordance with Requirement 5.1.3 in a central bank, a credit institution or bank authorised in a third country or a qualifying money market fund are held in an account or accounts identified separately from any accounts used to hold funds belonging to the firm; (f) they must introduce adequate organisational arrangements to minimise the risk of the loss or diminution of client assets or of rights in connection with those assets as a result of misuse of the assets, fraud, poor administration, inadequate record-keeping or negligence. 3.1.3 Client assets received, held or paid out by the firm are to be regarded as held by the firm on behalf of, and for the benefit of the relevant client/clients. 3.1.4 All client funds must be promptly lodged to a client account. 5
3.1.5 4 When providing investment services or where appropriate ancillary services to its client a firm shall act honestly, fairly and professionally in accordance with the best interest of its clients. 3.1.6 One client s assets must not be used to fund another client s transactions or positions. This does not preclude securities financing carried out in accordance with Section 7. 3.1.7 Differences, other than timing differences, that are material or recurrent in nature identified during the reconciliation process must be promptly notified to the Financial Regulator in writing. 3.1.8 A firm is obliged to ensure that it maintains satisfactory systems of control and keeps proper accounting records in relation to client funds and client financial instruments. In particular, it must ensure that it has proper systems of internal control designed to ensure that: (a) the balance on client accounts is not less than the amount it should be holding on behalf of clients; and (b) the amount and type of client financial instruments held by the firm or lodged with relevant parties or eligible custodians is not less than the amount and type of client financial instruments that the firm should be holding on behalf of clients. 3.1.9 A firm must arrange for the prompt registration of a client s registrable client financial instruments in the name of the client, except in the circumstances outlined in Requirement 6.4. 3.1.10 The receipt of funds from a client by way of cheque or other payable order becomes client funds upon receipt of the cheque or other payable order by the firm. Funds sent to a client by way of cheque or other payable order does not cease to be 4 Regulation 76(1)(a) 6
client funds until the cheque or other payable order is presented and paid by the eligible credit institution. 7
4 General Requirements 4.1 Financial Instruments and Funds 4.1.1 A firm must treat all funds and financial instruments received, held or paid out by it, for or on account of a client, in the course of carrying on its activities with or for that client as client assets, except in the circumstances covered by Requirement 4.7. 4.1.2 Where a firm passes client funds or client financial instruments to another person 5 in the course of carrying on its activities, the firm must inform that person that the funds are client funds and/or that the financial instruments are client financial instruments. 4.1.3 The firm s internal controls must require that all instructions to qualifying money market funds, eligible credit institutions, relevant parties or eligible custodians to pass client funds or financial instruments to another person must be validated by a second member of staff with appropriate level of authority. 4.2 Segregation 4.2.1 A firm must, except to the extent permitted in these Requirements, physically hold, or arrange for the holding of, client assets by a central bank, qualifying money market funds, eligible credit institutions, relevant parties or eligible custodians, separate from the firm s own assets and maintain accounting segregation as between firm and client assets. See also Requirement 4.12.4 5 This does not apply where client assets are due in settlement of a transaction or being returned to the client. 8
4.2.2 In the context of the designation 6 of client accounts in the firm s records, a firm authorised under the Investment Intermediaries Act is required to designate each account as a Section 52 Account in all of its financial records. In the same context, in the case of a firm authorised under the Regulations, the Financial Regulator will regard the designation of each client account as a Client Asset Account in all financial records as meeting the requirements of Regulation 160 (2) (a), (d) and (e). Attention is drawn to the relevant provisions of the Regulations, including Regulations 160(2) and 188 and to Section 52(6) of the Investment Intermediaries Act, 1995 as applicable. 4.2.3 A firm must notify a client where it proposes to pool that client s funds or financial instruments with those of one or more clients and, in the case of retail clients, provide a prominent warning of the resulting risks which clearly explain the meaning and implications of pooling 7. Each retail client must consent, in writing, to the holding of his/her funds or financial instruments in such a manner. The consents, and disclosures referred to in this requirement and elsewhere in these Requirements (including Requirements 4.3, 4.10, 6.3 and 6.4) shall be obtained and made before providing the first service either in the terms of business or investment management agreement as appropriate. 4.2.4 A firm should only pool a retail client s funds or financial instruments in the absence of the necessary consent where it can demonstrate that it has made every effort to procure such consent prior to the pooling of that client s funds or financial instruments and has issued its standard notification stating 6 Firms should ensure that all new accounts opened post 1 November 2007 are designated immediately in accordance with the requirements. The designation for accounts that were opened prior to 1 November 2007 should be amended to satisfy the requirements by no later than 30 April 2008. 7 This does not apply where the client is investing in a pooled investment such as a collective investment scheme. 9
that the notification will apply to the client relationship unless the firm hears to the contrary. 4.2.5 Where a firm holds client assets in a pooled client account, accounting segregation must be maintained (that is, the firm must maintain detailed records identifying the balance in the account belonging to each individual client and movements in that balance). 4.2.6 A firm must not use for the account of one client the assets of another client except where such use is in accordance with a legally enforceable agreement such as a set-off agreement (see below) or a securities financing arrangement (see Section 7). 4.2.7 8 A firm shall inform the client: (a) about the existence and the terms of any security interest or lien which the firm has or may have over the client s financial instruments or funds, (b) about any right of set-off the firm holds in relation to those instruments or funds; and (c) if applicable, about the fact, if any, that a depository may have a security interest or lien over, or right of set-off in relation to those instruments or funds. 4.2.8 The following criteria must be fulfilled 9 where it is sought to apply a set-off for the purpose of a client funds calculation A. Three Party Set-off (a) The three party set-off must: (i) be agreed in writing between the set-off client creditor and the firm and enforceable by the firm 8 Regulation 90 9 In the case of three party set-off the criteria must be fulfilled regardless of the nature of, or relationship between, the set-off client creditor and the set-off client debtor. This includes where the set-off client creditor and the set-off client debtor are married or related or are a natural person and a body corporate in which the natural person has an interest of any kind. 10
without notice to the set-off client creditor or any other action; (ii) be supported by a guarantee/indemnity from the setoff client creditor (as primary obligor) to the firm in respect of the obligations of the set-off client debtor to the firm in respect of which the set-off is sought to be effected; and (iii) effect a set-off between the obligations of the set-off client creditor to the firm under the guarantee/indemnity and the obligations of the firm to the set-off client creditor in respect of any credit balance on its account with the firm. (b) The guarantee/indemnity referred to in (a)(ii) must be executed as a deed. B. Bilateral Set-Off The bilateral set-off must be adequately documented and enforceable by the firm without notice to the client or any other action. C. All Set-Offs (a) Each set-off effected 10 must be written up in the ledger accounts of the set-off client(s) on the date on which it is effected. (b) (c) The firm must maintain, in accordance with the Books and Records Requirements issued by the Financial Regulator under Section 19 of the Investment Intermediaries Act, 1995 or in accordance with the Retention of Records Requirements set out in Regulation 40 of the Regulations and, as applicable all documents relating to the set off arrangements. The firm must ensure that: 10 This includes where it is treated as effected for the purposes of any client money reconciliation. 11
(i) the set-off client creditor in the case of the three party set-off and the relevant client in the case of bilateral set-off (the creditor) has the required capacity and authority to enter into the set off arrangements; (ii) all documentation relating to the set off arrangements is duly executed on behalf of the creditor; (iii) where the creditor is a body corporate, there is (if required under applicable law) corporate benefit accruing to it from the set off arrangements; and where necessary should obtain an opinion or opinions from its legal advisers on the issues set out at Requirements 4.2.8(c) (i) and (ii). (d) The firm must obtain an opinion or opinions from its legal advisers that the set off arrangements are legally wellfounded in all relevant jurisdictions and would be enforceable in all circumstances including, without limitation, any default of the set-off client(s) and any insolvency, bankruptcy, liquidation, reorganisation, moratorium, examinership of the set-off client creditor, the set-off client(s) or the firm. (e) The Financial Regulator expects that all opinions referred to above will be provided by independent external sources of advice of appropriate professional standing. The Financial Regulator may, at any time require that such advisers provide a confirmation to it that in the case of three party set-off the criteria set out at A (a) and (b), and C (c) (i) and (ii) and (d) have been complied with and in the case of bilateral set-off that the criteria set out at B and C(c)(i) and (ii) and (d) have been complied with. The Financial Regulator may also require copies of the relevant opinions and/or the documentation relating to the set off arrangements. 12
4.3 Assets to be held in a Client Account 4.3.1 A firm must ensure that client assets are held in a qualifying money market fund, a client account with a central bank or one or more eligible credit institutions, relevant parties or eligible custodians which the firm considers to be safe repositories for client assets. Client assets may only be passed to other persons on the written instructions of the client concerned. In this regard, acting in accordance with the terms of an investment management agreement or the completion of an order or application form will be considered to be a written instruction from the client to pay the client assets into a qualifying money market fund, or an account opened with a central bank, an eligible credit institution, relevant party or eligible custodian. 4.3.2 Where a firm deposits funds it holds on behalf of a client with a qualifying money market fund, the units in that money market fund should be held in accordance with the requirements for holding financial instruments belonging to clients. These requirements are set out in this section and Section 6. 4.3.3 Subject to Requirements 5.1.5 and 6.1 in deciding whether or not an eligible credit institution, a qualifying money market fund, relevant party or eligible custodian is a safe repository for client assets the firm will be required to undertake an appropriate and continuing risk assessment. The name of the qualifying money market fund, eligible credit institution, relevant party or eligible custodian with whom a client s assets are placed must be provided to the client where the qualifying money market fund, eligible credit institution, relevant party or eligible custodian is part of a 13
group of which the firm is a member and in all other cases on request from the client. 4.3.4 Where a client has indicated that he does not wish his assets to be held with a particular eligible credit institution, relevant party or eligible custodian the firm must return the assets to, or to the order of, the client as soon as possible. 4.3.5 11 Firms shall not place funds of a client in a qualifying money market fund where that client objects to such placement. 4.3.6 A client account with a central bank, a qualifying money market fund, an eligible credit institution, relevant party or eligible custodian must be designated in such a way as to make it clear that the client assets do not belong to the firm and are subject to the Regulations and Section 52 of the Investment Intermediaries Act, 1995, as appropriate 12. In the case of non-irish eligible credit institutions, relevant parties or eligible custodians it will be sufficient for the title of the account to sufficiently distinguish the account from any account containing assets that belong to the firm. 4.3.7 Before client assets are lodged to a client account with a central bank, a qualifying money market fund, an eligible credit institution, relevant party or eligible custodian, that institution must have agreed in writing that it will deliver to the firm a statement or similar document 13 daily 14 in the case of client funds and at least once a month in the case of client 11 Regulation 161(7) 12 The Financial Regulator would expect firms to request such wording as outlined in Requirement 4.2.2. Firms should ensure that all new accounts opened post 1 November 2007 are designated immediately in accordance with the requirements. The designation for accounts that were opened prior to 1 November 2007 should be amended to satisfy the requirements by no later than 30 April 2008. 13 This statement or similar document may be provided on-line on condition that the firm retains a copy, either in electronic or hard-copy format for audit trail purposes, and that a written version is available upon request by the firm. 14 In the case of fixed term deposits the firm must obtain a statement or other form of confirmation or similar document from the eligible credit institution at the commencement and conclusion of the fixed term. During the term of the deposit it will be sufficient for the firm to perform the daily reconciliation on the basis of a statement or other form of confirmation or similar document received from the eligible credit institution on at least a monthly basis. 14
financial instruments specifying all client assets held and a description and the amount of all the financial instruments held in client accounts. 4.3.8 15 A firm shall (a) Inform the client or potential client if accounts that contain financial instruments or funds belonging to that client or potential client are or will be subject to the law of a jurisdiction other than the State, and (b) Indicate that the rights of the client or potential client relating to those financial instruments or funds may differ accordingly. 4.3.9 A firm must not hold client assets in a client account opened with a central bank, a qualifying money market fund, an eligible credit institution, relevant party or eligible custodian 16 outside Ireland unless the firm has previously disclosed to the client in writing: (a) that the legal regime applying to the central bank, qualifying money market fund, eligible credit institution, relevant party or eligible custodian with whom the client account is held may be different to that of Ireland; (b) that in the event of a default of such an institution those assets may be treated differently from the position which would apply if the assets were held in a central bank, qualifying money market fund, eligible credit institution, relevant party or eligible custodian in Ireland; and (c) that the regulatory regime applying to the central bank, qualifying money market fund, eligible credit 15 Regulation 89 16 This includes situations where an Irish eligible custodian passes client assets to an eligible custodian outside Ireland. 15
institution, relevant party or eligible custodian with whom the client account is held may be different to that of Ireland. 4.3.10 In the case of a retail client the firm must obtain the written consent of the client before the assets are passed to a central bank, qualifying money market fund, eligible credit institution, relevant party or eligible custodian outside Ireland. A firm should only hold client assets in a client account with a central bank, qualifying money market fund, eligible credit institution, relevant party or eligible custodian outside Ireland in the absence of the necessary consent where it can demonstrate that it has made every effort to procure such consent prior to the placing of that client s assets with such a third party outside Ireland and has issued its standard notification stating that the notification will apply to the client relationship unless the firm hears to the contrary. 4.4 Default of a Qualifying Money Market Fund, Eligible Credit Institution, Relevant Party or Eligible Custodian 4.4.1 The firm s terms of business or investment management agreement, as appropriate, should clearly state the extent of the firm s liability in the event of the default of a qualifying money market fund, an eligible credit institution, relevant party or eligible custodian with whom client assets are held. 4.4.2 A firm must notify the Financial Regulator as soon as it becomes aware of the default of any party with whom client assets are held stating: 16
(a) (b) whether the firm intends to make good any shortfall that has arisen or may arise; and the amounts involved. 4.5 Reconciliations 4.5.1 A firm must, as often as necessary to ensure the accuracy of its records, reconcile all client assets in accordance with Requirement 4.5.2. This reconciliation must be performed: (a) daily in the case of client funds by the end of the following business day; and (b) at least monthly in the case of client financial instruments and within ten business days of the date to which the reconciliation relates. Where such reconciliations are carried out electronically the firm should retain a hard copy of the reconciliation. 4.5.2 In order to carry out the reconciliations the firm must, where applicable, reconcile: (a) the balance on each client account as recorded by the firm with the balance on that account as set out in the statement 17 or other form of confirmation or similar document issued by the central bank, qualifying money market fund, eligible credit institution or relevant party currency by currency; (b) the firm s records of client financial instruments which it does not physically hold with statements or similar document 18 obtained from qualifying money market 17 In the case of fixed term deposits the firm must obtain a statement or other form of confirmation or similar document from the eligible credit institution at the commencement and conclusion of the fixed term. During the term of the deposit it will be sufficient for the firm to perform the daily reconciliation on the basis of a statement or other form of confirmation or similar document received from the eligible credit institution on at least a monthly basis. 18 This statement or similar document may be provided on-line on condition that the firm retains a copy, either in electronic or hard copy format for audit trail purposes and that a written version is available upon request by the firm. 17
funds or eligible custodians and, in the case of dematerialised financial instruments not held through an eligible custodian, statements from the person who maintains the record of legal entitlement; and (c) its records of cash collateral held in respect of clients margined transactions with the statement or similar document issued by the person with whom that collateral is located. In addition, the firm must count all client financial instruments physically held by it, or any nominee company wholly owned by the firm, and reconcile the results of this count to its record of the client financial instruments in its physical possession. 4.5.3 The firm should retain a hard copy of all differences corrected unless they arise solely as a result of identified differences in timing. 4.5.4 Where differences, other than timing differences, are identified on any of the reconciliations above, these must be corrected as soon as possible following the identification of these differences. The firm is required to notify the Financial Regulator in writing within one business day of the completion of the reconciliation of any differences which are material or recurrent in nature. 4.6 Failure to perform reconciliations 4.6.1 A firm must notify the Financial Regulator immediately, and confirm in writing, where it has been unable or has failed to perform any of the reconciliations required by Requirement 4.5 within the timeframe permitted. 18
4.7 When Assets Cease to be Client Assets 4.7.1 Funds do not cease to be client funds until the cheque or other payable order is presented and paid by the eligible credit institution. 4.7.2 Assets cease to be client assets where: (a) they are paid, or transferred, to the client whether directly or into an account with an eligible credit institution, relevant party or eligible custodian in the name of the client (not being an account which is also in the name of the firm); or (b) they are paid, or transferred, to a third party on the written instructions 19 of the client and are no longer under the control of the firm. In addition, acting in accordance with the terms of an investment management agreement or the completion of an order or application form will be considered to be a request from the client to pay the client assets to the relevant third party; (c) funds are due and payable to the firm itself, in accordance with the provisions detailed below; (d) a cheque or other payable order received from a client is not honoured by the paying eligible credit institution. 4.7.3 A firm may treat funds as due and payable where: (a) the amount has been accurately calculated and is in accordance with a formula or basis previously disclosed to the client by the firm; or (b) ten business days have elapsed since a statement showing the amount of fees and commissions has been 19 Written instructions are not required where client assets are passed for settlement within CREST or other settlement system. 19
issued to the client, and the client has not raised any queries; or (c) the precise amount of fees or commissions has been agreed by the client in writing, or has been finally determined by a court, arbitrator or arbiter. 4.8 Client Statements 4.8.1 20 A firm that holds client financial instruments or client funds shall at least once a year, send to each client for whom the firm holds financial instruments or funds, a statement in a durable medium of those financial instruments or funds unless such a statement has been provided in any other periodic statement 21. Requirement 4.8.1 does not apply to a credit institution authorised under Directive 2006/48/EC in respect of deposits within the meaning of that Directive held by that institution. 4.8.2 22 This statement referred to in Requirement 4.8.1 shall include the following information: a) details of all the financial instruments or funds held by the firm for the client at the end of the period covered by the statement; b) the extent to which any client financial instruments or client funds have been the subject of securities financing transactions; c) the extent of any benefit that has accrued to the client by virtue of participation in any securities financing transactions and the basis on which that benefit has accrued; and 20 Regulation 96(18)& 96(19) 21 A firm which holds financial instruments or funds and carries out the service of portfolio management for a client may include statement referred to in this Requirement in the periodic statement it provides to that client under Regulation 96 Paragraph 9 of the Regulations Regulation 96(22) 22 Regulation 96(20) 20
d) the amount of cash balances (which may be shown on a separate statement) held by the firm as of the statement date; 4.8.3 23 Where the portfolio of a client includes the proceeds of one or more unsettled transactions, the information referred to in Requirement 4.8.2(a) may be based on either the trade date or the settlement date provided that the same basis is applied consistently to all such information in the statement. 4.8.4 The statement referred to in Requirement 4.8.1 must also identify any client financial instruments registered in the client s own name, which are physically held in custody by, or on behalf of, the firm separately from those registered in any other name and show the market value of any collateral held as at the date of the statement. 4.9 Auditor s Report 4.9.1 The firm is required to ensure that its external auditors: (a) examine the books and records of the firm in relation to client assets; (b) review the systems and procedures employed by the firm in relation to the safe-keeping of, and accounting for, client assets; and (c) examine compliance by the firm with these Requirements on an annual basis, or more frequently as required by the Financial Regulator, and report in a format acceptable to the Financial Regulator stating whether, in their opinion, these Requirements have been complied with. Note: A firm acting in compliance with this requirement will be considered to be acting in compliance with Regulation 144(1) of the Regulations. 23 Regulation 96(21) 21
4.10 Transactions involving collateral margined transactions 24 4.10.1 Before a margin account is opened by the firm, with an eligible credit institution, relevant party or eligible custodian, on behalf of a client or clients, the firm must comply with the procedures laid down in Requirement 4.3. 4.10.2 The firm is required to ensure that a client s assets held in respect of margin account transactions are kept in a separate account to other assets held on behalf of that client. 4.10.3 Before the firm deposits the collateral with, pledges, charges or grants a security arrangement over the collateral to, an eligible credit institution, relevant party or eligible custodian, it must: (a) (b) obtain the client s prior written consent; obtain the client s consents referred to in Requirement 4.10.4 below, where applicable; (c) undertake an appropriate and continuing risk assessment of the eligible credit institution, relevant party or eligible custodian with whom the firm proposes to deposit the collateral, or pledge or charge or grant a security arrangement over the collateral; (d) notify the eligible credit institution, relevant party or eligible custodian that the firm is under an obligation to keep this collateral separate from the firm s collateral; 24 In accordance with Recital 27 of Directive 2004/39/EC, where a client in line with community legislation and in particular with Directive 2004/47/EC on financial collateral arrangements, transfers full ownership of financial instruments or funds to a firm for the purpose of securing or otherwise covering a required margin such financial instruments or client funds should no longer be treated as belonging to the client. The firm should ensure that client documentation clearly outlines the approach adopted by the firm. Any financial instruments or client funds held by the firm in excess of the required margin should be treated as financial instruments or client funds and treated in accordance with Requirement 4.10. 22
(e) instruct the eligible credit institution, relevant party or eligible custodian that: (i) the value of that collateral passed by the firm on behalf of clients is to be credited to the firm s client transaction account with that party; and (ii) in the case where that collateral is passed to an intermediate broker and the initial margin has been liquidated to satisfy margin requirements, the balance of the sale proceeds must be immediately paid into a client account; and (iii) in the case where the collateral is passed to an exchange or clearing house, the sale proceeds are to be dealt with in accordance with the rules of the relevant exchange or clearing house; (f) (g) (h) (i) ensure that client s fully paid (non-collateral) and margin account financial instruments will be held in separate accounts and that no right of set-off will apply; notify the client that the collateral will not be registered in the client s name, if this is the case; notify the client of the procedure which will apply in the event of the client s default where the proceeds of the sale of the collateral exceeds the amount owed by the client to the firm; notify any eligible credit institution, relevant party or eligible custodian holding the collateral that; (i) (ii) the collateral does not belong to the firm; and the eligible credit institution, relevant party or eligible custodian must not claim any lien or right of retention or sale over the collateral except to cover the obligations to the eligible credit institution, relevant party or eligible custodian which gave rise to that deposit, pledge, charge or security arrangement or any charges relating to 23
the administration or safekeeping of the collateral. 4.10.4 The firm must have prior written consent from its client if it proposes to return to the client, collateral other than the original collateral, or original type of collateral. This does not preclude the firm from returning the cash equivalent where the collateral matures. 4.10.5 The firm must not (a) (b) (c) use collateral in the form of a client s financial instruments as security for the firm s own obligations without the prior written consent from the client; use collateral in the form of a client s funds as security for the firm s own obligations. use a client s collateral as security for the obligations of another client or another person unless the criteria set down in Requirement 4.2 regarding Set-Off agreements are fulfilled in full. 4.10.6 A firm need not obtain written consent from a professional client under Requirements 4.10.3 to 4.10.5 if prior written notice has been given by the firm. 4.11 General Information for Clients 4.11.1 25 Firms shall provide retail clients or potential retail clients with the following general information where relevant: (a) If the firm holds financial instruments or client funds, a summary description of the steps which the firm takes to ensure their protection, including summary details of any relevant investor compensation scheme which applies to the firm by virtue of its activities in the State. 25 Regulation 82(g) 24
4.12 26 Information about Financial Instruments belonging to Retail Clients 4.12.1 Where a firm holds financial instruments or funds belonging to a retail client, or potential retail client, the firm shall provide them with such of the information specified in this Requirement and in Requirement 4.2.7, 4.3.8 and 7.3 as is relevant. 4.12.2 Where the financial instruments or funds may be held by a third party on behalf of the firm, the firm shall inform the retail client or potential retail client of the responsibility of the firm, under the applicable national law for (a) any acts or omissions of the third party, and (b) the consequences for the client of the insolvency, if any, of the third party. 4.12.3 Where the financial instruments of a retail client or potential retail client may, if permitted by national law, be held in an omnibus account by a third party, a firm shall (a) inform the client of this fact, and (b) provide a prominent warning of the resulting risks. 4.12.4 Where it is not possible under national law for client financial instruments held with a third party to be held separately identifiable from the proprietary financial instruments of that third party or of a firm, the firm shall (a) inform the retail client or potential retail client, and (b) provide a prominent warning of the resulting risks. 26 Regulation 88 25
5 Client Funds The requirements in this section are in addition to the General Requirements set out in Section 4. 5.1 Payment of Client Funds into a Client Account with a Central Bank, an Eligible Credit Institution, Relevant Party or Qualifying money market fund 5.1.1 The receipt of funds from a client by way of cheque or other payable order becomes client funds upon receipt of that cheque or other payable order by the firm. Where possible, funds should be received in the form of an automated transfer rather than in the form of a cheque or other payable order. 5.1.2 The firm is required to issue the client with a receipt in all cases where funds are received in the form of cash. The firm is also required to issue a receipt where funds are received by way of cheque or other payable order, except where the funds are received in settlement of a specific contract note or invoice issued by the firm to the client and the two amounts match. 5.1.3 27 A firm, on receiving any client funds, shall without delay deposit those funds into one or more accounts opened with any of the following: (a) a central bank; (b) a credit institution authorised in accordance with Directive 2006/48/EC; 27 Regulation 161(4) & 161(5) 26
(c) (d) a bank authorised in a third country; or a qualifying money market fund. Requirement 5.1.3 does not apply to a credit institution authorised under Directive 2006/48/EC in relation to deposits within the meaning of that Directive held by that institution. 5.1.4 Subject to Requirements 5.1.6 and 5.1.7 below, where a firm receives client funds, it must lodge it to the appropriate client account as soon as possible, but no later than one business day following receipt, or return it to the client. The funds must be lodged in the currency of receipt unless the firm has no client account denominated in that currency and it would be unduly burdensome for it to open such an account, in which case the firm may convert the funds and hold them in a client account in a different currency. Details of such arrangements and a general statement relating to exchange risk must be set out in the firm s terms of business or investment management agreement as appropriate. 5.1.5 28 Where firms do not deposit client funds with a central bank, the firms shall exercise all due skill, care and diligence in the (a) selection, appointment and periodic review of the credit institution, bank or money market fund in which the funds are deposited, and (b) the arrangements for the holding of those funds, taking into account the expertise and market reputation of the eligible credit institution or money market fund, with a view to ensuring the protection of clients rights, as well as any (a) legal or regulatory requirements, or (b) market practices related to the holding of client funds that could adversely affect clients rights. 28 Regulation 161(6) 27
5.1.6 Where client funds are likely to be received by the firm in the form of an automated transfer, the firm should advise all clients, in advance in writing, of the account number into which client funds should be lodged. In the event that the funds are received directly to the firm s own account, the firm must within one business day pay the funds into a client account in accordance with these requirements. 5.1.7 Where a firm receives a mixed remittance or is liable to pay funds to a client (including interest on client funds) it must, within one business day, lodge the full sum into a client account in accordance with Requirement 5.1.4 of this section. 5.1.8 A firm shall pay its own funds into a client account if required to do so by the Financial Regulator. 5.2 Written Confirmations 5.2.1 Before client funds are lodged to a client account with a central bank or an eligible credit institution or an eligible custodian the firm is required to have received written confirmation 29 from the institution concerned: (a) (b) that all client funds are held by the firm as trustee and that the central bank or eligible credit institution is not entitled to combine the account with any other account or to exercise any right of set-off or counterclaim against funds in that account in respect of any sum owed to it by any person; that the central bank or eligible credit institution, will designate the account in its records in such a way as to make it clear that the client funds do not belong to the firm and are subject to the provisions of the Regulations and Section 52 of the Investment Intermediaries Act, 29 Firms should ensure such confirmations are received immediately for all new accounts opened post 1 November 2007 in accordance with the requirements. The confirmation for accounts that were opened prior to 1 November 2007 should be obtained to satisfy the requirements by no later than 30 April 2008. 28
1995 as appropriate. In the case of non-irish central banks or eligible credit institutions it will be sufficient for the acknowledgement to confirm that the title of the account sufficiently distinguishes the account from any account containing funds that belong to the firm; and (c) of the procedures and authorities for the giving and receiving of instructions. A copy of this written confirmation shall be retained by the firm. 5.3 Daily Calculation 5.3.1 Every business day a firm must ensure that its client money resource, i.e. the aggregate value of client funds held in accordance with Regulations 160 and 161 of the Regulations or Section 52 of the Investment Intermediaries Act, 1995 as appropriate 30, for example in its cash book, (namely A) is at least equal to the amount it should be holding for clients, its client money requirement, (namely B). This calculation must be carried out, and any necessary funding (arising where A is less than B) deposited, by the close of business on the business day following the business day to which it relates. 5.3.2 (B) shall be the sum of (C) and (D) calculated as set out below: 5.3.3 (C) shall be the aggregate of the following amounts calculated for each client 31 where the aggregate is positive: (i) that client s cash balance as per the firm s own records; (ii) the balance on that client s transaction account with the firm including: (a) balances in respect of sale proceeds due to the client where the client has delivered the securities and the 30 For the avoidance of doubt this includes funds held on call or fixed term deposit. 31 This does not prevent netting but ensures that one client s assets are not used to fund another client s transactions. 29
proceeds of the sale have not yet been credited to the client account; (b) balances in respect of the cost of purchases paid for by the client where the transaction has not yet settled; (c) the balance on that client s margin account; (d) dividends or interest due to the client; (e) any other relevant amounts; and (iii) the value of that client s collateral that takes the form of cash. 5.3.4 (D) shall be calculated in accordance with Requirement 5.3.5. 5.3.5 Firms will be required to maintain in the client account, in addition to the amount of (C) calculated in accordance with Requirement 5.3.3, an amount equivalent to 8% of the average level of settled debtors over the preceding five business days which amount shall be called (D). 5.3.6 Where a firm deems it prudent in the interests of the protection of clients it must deposit its own funds into a client account. 5.3.7 A firm must immediately notify the Financial Regulator of any deposits under this requirement that exceeds 0.5 per cent of (C) as calculated in accordance with the above together with the reason for such deposit. 5.4 Failure to Perform Calculations 5.4.1 A firm must notify the Financial Regulator immediately, and confirm in writing, where it has been unable or has failed to perform any or all aspects of the calculation required by Requirement 5.2 within the timeframe permitted by that requirement. (i) The purpose for which the funds were received or paid out. 30
5.5 Interest 5.5.1 A firm must disclose to a client in writing, in its terms of business or investment management agreement, as appropriate, whether or not interest is payable in respect of that client s funds and on what terms. 31
6 Client Financial Instruments 6.1 Depositing Client Financial Instruments 6.1.1 32 A firm may deposit financial instruments held by them on behalf of their clients into an account or accounts opened with a third party provided that the firm: (a) exercises all due skill, care and diligence in the selection, appointment and periodic review of the third party and of the arrangements for holding and safekeeping of those financial instruments, and (b) takes into account the expertise and market reputation of the third party as well as any legal requirements or market practices related to the holding of those financial instruments that could adversely affect clients rights. 6.1.2 33 If the safekeeping of financial instruments for the account of another person is subject to specific regulation and supervision in a jurisdiction where the firm proposes to deposit client financial instruments with a third party, the firm must not deposit those financial instruments in that jurisdiction with a third party which is not subject to such regulation and supervision. 6.1.3 34 A firm shall not deposit financial instruments held on behalf of clients with a third party in a third country that does not regulate the holding and safekeeping of financial 32 Regulation 161(1) 33 Regulation 161(2) 34 Regulation 161(3) 32